Aviation Turbine Fuel Pricing in India

Indian domestic carriers pay around 65 per cent higher price for ATF than their global counterparts

Aviation Turbine Fuel (ATF), or jet fuel, is kerosene-based and does not freeze at high altitudes. It also has other properties such as fluidity, viscosity, non-corrosiveness, stability and cleanliness. The Indian kerosene market can be divided into three categories, namely industrial kerosene, domestic kerosene sold through Public Distribution System and ATF. The price of ATF in India was earlier regulated under an Administered Price Mechanism (APM) which was dismantled in April 2001. Under the APM, the government dictated the price of ATF ensuring a fixed profit margin for the oil marketing companies (OMCs) subject to predetermined capacity utilisation. However, on account of the ever increasing burden of subsidies on the government, ATF pricing was recalibrated to a market-based system. The price of ATF since then has been fixed by the OMCs based on the prevailing global market price of crude plus input costs.

ATF is derived from Brent crude, which is imported by India from the Oil Producing and Exporting Countries (OPEC), and hence its price is affected by fluctuation in global crude oil prices. ATF is not imported into India as a finished product. The Indian carriers being the single largest user of ATF, are the worst affected especially as the price of ATF in India has been rising continuously in the recent years. Currently, the price that Indian carriers pay for ATF is 65 per cent higher than their international counterparts. This prevents the domestic carriers from competing fairly with the global players, rendering them loss-making entities. The airlines are also placed at a serious disadvantage on account of irrational tax structure of ATF and cartelisation of the OMCs through monopoly pricing. The three major OMCs supplying ATF to the Indian carriers are the Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd. and Indian Oil Corporation Ltd.

The price of ATF is based on import-parity principle. The price structure includes import price of crude oil, import duties levied by the government and the cost of refining crude. Currently, import duty on crude is 20 per cent and the marketing margin added by the OMCs is 21 per cent. Thereafter, the state governments impose taxes that range between 16 and 30 per cent, throughput charges, excise duty at eight per cent and customs duty at five per cent.

Competing Against Foreign Carriers

Indian carriers are unable to compete against foreign carriers on account of the higher price of ATF in India. As stated earlier, Indian domestic carriers pay around 65 per cent higher price for ATF than their global counterparts. Let us have a glimpse of the scenario within India. In order to narrow our focus, out of the six Indian metros which handle 70 per cent of the total annual traffic, the price variations in four have been considered.

There is a vast difference between the price of ATF supplied for domestic and international operations and this gap is the largest in Kolkata and Chennai. The ATF supplied to international flights is priced lower because the imported crude used to produce ATF for international flights is exempted from customs duty. In April 2006, ATF sold for foreign bound flights was declared as ‘Deemed Export’. The advantage of low-priced ATF for operating on the international segment could have benefited Indian carriers too but they are unable to benefit from this owing to their insignificant market share.

Among the Indian carriers, Jet Airways, Air India, SpiceJet and IndiGo collectively hold only around 30 per cent market share on the international segment as they are unable to compete against the global sharks like Emirates. Another typical constraint faced by Indian carriers to fly international is that they must have to their credit at least five years of domestic operations and a minimum fleet size of 20 aircraft, referred to as the 5/20 rule. This further accentuates the difficulty for Indian carriers to compete against global players. One sure way to curtail fuel cost is to increase international operations. But, the major international carriers operating in India such as Emirates, Qatar and Etihad have been increasing their seat capacity on lucrative routes as some of the existing Indian carriers and the new ventures like AirAsia India and Tata-Singapore Airlines are waiting in anticipation of the government to discard the 5/20 rule.

The Tax Burden

Thus, by now it is clear that ATF in India is priced under the import parity principle which does not relate to the production cost of ATF. The various taxes levied on ATF are as under:

• Customs Duty. Even though ATF is not imported as a finished product, it is refined within the country and is burdened by a duty of five per cent. On this basic duty, counter veiling duty (CVD) and cess are added amounting to a ten per cent. But this duty is only applied to ATF lifted for domestic operations. As per customs circular 65/2001 dated November 19, 2001, customs duty is also levied on fuel available in tanks of aircraft after completing an international operation, if the next leg of the flight is on domestic route.
• Excise Duty. Around eight per cent excise is levied on ATF which is inclusive of cess. There are provisions for centralised value added tax (CENVAT) credit for excise duty paid on ATF in CENVAT Credit Rules (CCR-2004). CCR applies to all imported goods except specifically excluded inputs. But ATF has not been privileged with the provision. This is in direct contrast with the CCR-2004 as ATF is not included in the list of excluded inputs, but is an input for providing taxable service by airlines.
• Sales/State Tax. The ATF uplifted for international operations to/from India are exempted from sales tax. But the domestic operations by Indian carriers are subjected to sales tax ranging from four to 30 per cent, varying from state to state. The sales tax on ATF accounts for 0.5 to two per cent of the total sales tax collected by states. According to Schedule III of the state VAT acts, special rates are allowed to be charged on ATF. This provision has been exploited by the state governments. As provided for in the Budget 2007-08, ATF lifted by turboprop aircraft is given ‘Declared Goods’ status under the Central sales tax Act. Even regional jets with take-off weight less than 40,000 kg are charged a flat four per cent sales tax. Ideally, ATF ought to be categorised as “Declared Goods” for all aircraft thus reducing the tax burden to four per cent for all states.
• Value Added Tax (VAT). It is very important to understand the complexity of VAT that is being charged on various petroleum products including ATF. VAT has replaced sales tax in a majority of states in India to avoid the cascading effect of taxes. Commodities including declared goods are charged VAT and get the benefit of Input Tax Credit (ITC), the exceptions being liquor, petrol, diesel, ATF, lottery tickets and other motor spirits whose prices are not totally market determined. These exceptions are supposed to continue to be taxed as per the Sales Tax Act or State Act or even under some provisional VAT Act with uniform floor rate decided by the Empowered Committee. The major gaps in implementing VAT are as under:
• ATF is not being taxed at normal VAT rate but at special rates much higher than the normal VAT rates.
• In spite of ATF being the final product of crude being taxed, no Input Tax Credit is being given to inputs (crude) or the capital goods used in exploration and refining.
• Multi-point tax is being levied on ATF.
• No uniformity, as some states levy at single-point and some at multi-point.
• In addition to VAT, some other taxes such as cess are also being levied in some states.
• Even the ITC on entry taxes is not available.
• Irrecoverable taxes on ATF are still being levied whose impact cannot be passed onto consumers.
• Throughput Charges. As per the Airport Economic Regulatory Authority (AERA) Act, 2008, the levy or increase of any throughput charges on ATF is to be implemented with the authority’s approval. These charges are levied typically for providing infrastructure and fuelling facilities by airport operators. At the request of the Airports Authority of India (AAI), AERA had permitted the revised rates with effect from April 1, 2010, with an annual escalation of five per cent. The civil enclaves at Goa and Pune are exempted and were considered separately by the authority. It should be kept in mind that the charges are for using the fuelling facilities and infrastructure, but they are being charged at per kilo-litre rate. The authority considers the revenue of operators from fuelling services as part of the passenger yield cap calculation. The rationale behind this is that if the throughput charges are high, they have an adverse impact on the finances of airlines but lower airport charges. In the recent past, there has been a hike of 345 per cent in airport charges with no relief even in fuel throughput charges at the Indira Gandhi International Airport in Delhi. The reason is that there is no mathematical formula for calculating these charges. They are based on negotiations between the provider and the buyer. Any charges levied on fuel are a part of aeronautical tariff. These are higher when the carriers use infrastructure such as fuel hydrants.